How to Backtest Options Strategies? Best Tool You Can Use

With technological advancement, methods of investing have also revolutionized with digital avenues to invest in options, forex, stocks, etc.

Although investment and trading have become easier and more accessible to more people, the risk of failure is also high. A petty wrong move and you can lose all of the money you invested.

Many platforms for trading and investments have also evolved, making it easier for people without technical knowledge to make investments.

But how to ensure that their money doesn’t go in vain? It is where the platform comes in that is selling and buying strategies based on different criteria and rules. These strategies can be replicated with real money to make returns on investments.

But how do you ensure that these strategies won’t fail? You can ensure that stock and backtesting help you see if these strategies work for you.

In this article, we are going to talk about the backtesting of Options Strategies and the best platforms you can capitalize on.

So let’s get into it.

What Is Options Backtesting?

Backtesting refers to applying a strategy or predictive model on historical data and determining the strategy’s accuracy. How it works is that a strategy is applied to the historical data to see if the strategy gives positive or negative results.

There are a lot of backtesting measures like return, risk-adjusted return, volatility, profit/loss, market exposure, etc.

When we talk about options backtesting, it refers to testing the accuracy of strategies developed for options trading. You can have an estimation of options trading strategy performance if used with the real market conditions.

It includes detailed testing and reports like drawdown, reward ratios, compounded return, winning percentage, etc.

Option Backtesting Vs. Stock Backtesting

What is the difference between option backtesting and stock backtesting?

Before we go into defining both types of backtesting, let’s highlight the difference between the two:

Option and Stock backtesting is similar in nature, but there are different criteria in testing. It implies that testing criteria to check an option’s trading strategy’s viability differ from that of a stock trading strategy.

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We can define stock backtesting as the process of testing the viability of a chosen set of technical and fundamental criterias that have been successful regarding stock trading.

On the other hand, the options strategy is a similar test, but the chosen criteria of testing are different in that case.

How To Backtest Options Strategies?

Let’s generally talk about options and strategies for backtesting. There are two methods: using the deta from a data seller, applying analytics based on your knowledge, and using the backtesting software.

The first method is not very popular as a lot of people with no technical knowledge are also into investing and trading securities.

Therefore, we can establish that you will need backtesting software to assess a strategy’s viability. What is backtesting software?

Take it as software that lets you get information about a strategy by its application on different criteria, as we mentioned above.

Essentially, simulations are run on a trading strategy for options, stocks, forex, etc., to check the accuracy of the strategies.

Tools For Options Strategies Backtesting

We are going to list some of the tools that you can leverage for options strategies backtesting:

1.    Option Alpha

OptionAlpha is a dedicated backtesting tool for options strategies. You can analyze the performance of different options strategies and determine which strategy is the right one to implement.

You can run your own backtests of options strategies within minutes and use all available historical data of the relevant options.

The main features of Option Alpha are as follows:

  • Use the backtesting engine to test your ideas on options backtesting before you enter the world of live trading
  • You can also do allocation testing by trying and testing different positions and optimizing the options strategies
  • Crowdsourced strategy performance rankings to find ideas about your trading strategy
  • Easy editing with tools that enable you to tweak, update, and change things in your backtest
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2.    Interactive Brokers

Interactive Brokers is a trading platform that is renowned for its competitive rates and good reputation.

The company is considered a pioneer in the discount brokerage business model. Whether you want to invest in stocks, options, forex, mutual funds, futures, ETFs, bonds, etc., you can trust Interactive Brokers.

There are over 30 advanced trading tools and fundamental backtesting systems as a part of advanced Portfolio Builder functionality.

You get the freedom to design the investment strategy and test if it performs well by relying on technical and fundamental data analysis.

You also get top-tier fundamental data, including buy-side providers, real-time data, stock reports, and much more.

3.    TradersCockpit

TradersCockpit is a trading and testing platform for traders, brokerage firms, and investors. You can backtest your option strategies with the tool as well as test the performance of strategies for stocks, mutual funds, etc.

The chosen test criteria for options include gain/loss, total returns, average trades, backtesting dates, and a lot of other metrics.

The main features of TradersCockpit are as follows:

  • A cloud-based platform with an interactive user interface for investors and traders
  • Multi-frame strategies, detailed analysis charts, and Options Workshops
  • Preset dashboards and templates for backtesting
  • Backtesting features like EOD and multi-frame strategies

Everything is good about TradersCockpit, but many advanced features are still missing.

4.    StockMock

You can also rely on StockMock, a dedicated option strategy backtesting online platform. The platform provides you with performance tests based on different criteria and reports including average trades, cumulative percentage gains, and losses, returns, backtesting dates, and a lot more.

The main features of StockMock are as follows:

  • Backtesting capabilities with Multi-frame strategies and EOD
  • Multiple filters and detailed analysis charts
  • Optimized your tests and strategies
  • It is an affordable backtesting software for different financial institutions with
  • the main focus on options

5.    TradeStation

TradeStation is also a dedicated backtesting platform for investors and traders interested in stocks, options, futures, etc., by relying on the historical data of the financial instruments.

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You can assess the performance and accuracy of the strategy’s total net profit, maximum drawdown, the annual rate of return, number of trades, etc.

TradeStation has the following features:

  • Weekly and monthly charts
  • Backtesting for finer data intervals
  • Monitor positions and orders by using strategy automation
  • Optimize the process based on parameters
  • Auto trading
  • No commission for stocks and ETFs

6.    TastyTrade

TastyTrade is a dedicated options backtesting platform that gives you insights about options strategy across any underlying.

The backtesting features of the platform analyze the strategy by applying past data and predicting if it will work in the future as well or not. The main criteria used include max loss, profit per trade, win rate, etc.

The main features of TastyTrade are as follows:

  • Assess a specific strategy on a selected underlying and analyze its performance
  • Adjust and manage trade specifications like days until expiration, deltas, number of contracts, etc., for balancing risk and reward
  • Parameters management on every specific day before expiration or set a stop loss

Which Tool Is Best For Options Backtesting?

A verdict can’t be given if we have to recommend one tool as the best platform for options strategies backtesting.

The decision about which tool is good, better, or best depends on the tools’ requirements, test criteria, and many other features.

When you are choosing a backtesting software, you must look for factors of language choices, operating system support, trade indicators, and execution.

Therefore, you should look if a tool is fulfilling your requirements. If the answer is yes, it will be the best option backtesting tool; if the answer is no, you should look for other tools to facilitate you.

Conclusion

We have discussed everything you need to know about the backtesting of options strategies. Whether you are a veteran investor or trader looking for a backtesting tool or someone just stepping into the world of investing, you can choose any of the tools we have mentioned. Consider your requirements and choose the tool that suits you!